What does "the market is overvalued" actually mean?

[disneysteve]

How about the number of stocks that don't really go "belly up" but basically get "vetted" out as to where, "Gee, you aren't worth as much as we all thought you were worth? I think we were all on a buying spree. Oops."

Can the almighty diversification immunize you from that?

Yes, I think diversification does protect you from that. During the tech bubble, everyone was piling money into tech stocks because they were going up in value for no good reason. Companies with zero earnings saw their share prices skyrocket. Too many people concentrated too much of their money in one sector and lost their shirts when the bubble burst.

Me, I made some money during the tech bubble by trading a few select stocks (ebay, Sun, etc.). I didn't dump my whole portfolio into them and I didn't get too greedy. I made a decent profit and got out. I did the same the past year with the banking crisis - made some money and got out. In the meantime, I maintained a well diversified portfolio invested in various sectors plus bonds, real estate and precious metals. As I've said, some of my investments lost money in 2008 but others did just fine. That's the whole point of diversification.

[Scanner]

My question is part "rhetorical" and part "genuine".

To answer my own question, I think the consequence has been, in the last 20 or so years, since pretty much Clinton. . .to place a little too much undue faith in the stock market as the answer to every woe or investment problem.

I mean, crap, just 5 years ago, President Bush and the REpublican Congress were seriously considering taking SSI trust money and putting it in the market. Why? Well, golly gee, because it averages 7% return.

Now. . .what if we had? Not to be rhetorical again, it would have caused a 2-5 year rally and then that next pop would have been "sonic" IMHO.

I think we all place money in the stock market out of habit and conditioning more than fundamentals. I think too much capital has been pumped into it.

[Scanner]

BTW, I actually appreciate all the faith the forum has in American Enterprise. It's actually very "yankee doodle" of you all. I suppose I just don't have the level of faith you all possess.

I am still an "unbeleiver" and yet to be evangelized

[Scanner]

Peer Pressure Why Even Sophisticated Investors Succumb to Groupthink: Tech Ticker, Yahoo! Finance

DisneySteve/BA,

I am ordering a functional MRI on the both of your brains.

And me, lol.

[disneysteve]

Interesting video/article, Scanner. Personally, I don't think I follow the herd. I've lived through the tech bubble and the real estate bubble and quite intentionally avoided both. As I said, I did a little speculating with some "play" money during the tech bubble but I knew that the values couldn't possibly hold up. Same with real estate. I saw people paying crazy high prices for properties. I saw people with zero real estate experience buying properties to flip and thought they were insane. At one point a few years ago, I actually looked into buying a rental property in Florida but I ran the numbers, spoke to several owners in the area, spoke with a couple of property managers and decided that the deal just didn't make sense.

Where are we now? We're in a situation where lots of investors lost a ton of money in 2008 and sold off all their stock near the bottom of the market. Since then, the major indices have gone up what, 30% or something like that? Now, some of those same folks are starting to think that it might be time to start getting back in. It makes no sense. Sell low. Buy high. That is the herd mentality, something I've never followed.

I do own less stock today than I did a few years ago. That is partly due to the market drop and partly due to me intentionally adjusting my allocation, particularly in my daughter's college savings, since she is older and closer to college age now.

I'm not trying to convert anyone. I just think the average investor follows the herd in the wrong direction, getting out when the market is down and poised for a rebound and buying in when times are great and prices are riding high.

[Scanner]

I guess you could summarize me a "Long term contrarian" for now. Hey, I rode down with you all too (well , 1/2 of my/our portfolio) and rode it back up here a litle - the last 8-9 months.

I dont think the next 20 years will produce the gains typical of stocks in the 21rst century (7%).

I think commodities and eventually real estate will, as resources diminish and populations grow and our supply of fiat money grows.

What it will do next week, I sure as heck don't know or have a thought on.

[Broken Arrow]

Peer Pressure Why Even Sophisticated Investors Succumb to Groupthink: Tech Ticker, Yahoo! Finance

DisneySteve/BA,

I am ordering a functional MRI on the both of your brains.

And me, lol.

Hehe, sure, if it's free.

No, I can tell you right now that I don't group-think, and I don't follow the herd. In fact, were you to know me in real life, you'd see how much I do not follow conventions.

To be in the stock market displays no more herd-mentality than simply driving a car. I don't drive a car and trade the stock market because because everybody else does it and I want to cave to some peer pressure. No! I drive a car and trade the stock market because it gets me to where I want to go. Nothing more and nothing less.

And perhaps you are just displaying your off-beat humor again, but I am such a scrappy, self-thinking type that, to even be insinuated that I am just another mindless member of some herd is insulting to me.

Well... ok, the truth is, while I don't mind bucking the herd, but I also don't mind following them either. In the end, I see myself as a simple pragmatist. I go wherever I think there is money to be made, regardless of the markets. Investments aren't like our friends or family. We should not get attached to them for any reason, because if we do, we seriously risk ending up on the wrong side of the trade.

You don't want to trade stocks? No problem. There is such a thing as successful commodities traders. There are those who trade in nothing but option contracts. There's also Forex as well The point is, we are getting way too preoccupied with something that's really not that important: Investment vehicles such as the stock market. What truly matters is what's in our head? Forget the car and what anybody else drives. Let's focus on becoming better drivers.

[Scanner]

And perhaps you are just displaying your off-beat humor again, but I am such a scrappy, self-thinking type that, to even be insinuated that I am just another mindless member of some herd is insulting to me

Aw c'mon.

Your ego can't be that fragile, can it? You don't strike me as such.

I can take the "doomsday" and "conspiracy" pokes and not internalize them.

Well though. . .since you bring it up. . .what is the "herd" doing and what is "BA" doing that's different then? (honest question. . .not rhetorical this time)

[disneysteve]

Well though. . .since you bring it up. . .what is the "herd" doing and what is "BA" doing that's different then? (honest question. . .not rhetorical this time)

We've gotten off track from the original question, but I think I already touched on this question in my last post. Lots of people, the herd, saw the value of their stock holdings fall and decided to sell off their stocks, thus locking in what were only paper losses until that point. That includes, incidentally, many professionals and fund managers who are sitting on record amounts of cash. I stuck in there and held onto my stocks. In fact, I continued buying through automatic monthly investment plans.

What happened next? Stocks started to recover. My S&P fund is up 19.04% YTD. Healthcare is up 12.56%. My international fund is up 35.33%. Small company fund is up 38.90%. So while the herd has been sitting on the sidelines earning 0.5% on their MMA, I've watched my portfolio recover very nicely. I had the same losses last year as everyone else, but I didn't run screaming from the stock market.

Now, those folks are seeing the market up a lot from when they ran away and they are starting to put their money back in. The only problem is they're closing the barn door after the proverbial horse has gone. They're being attracted by recent returns that they've already missed. The people who made money are those who had skin in the game during that period - not the herd.

[Broken Arrow]

Aw c'mon.

Your ego can't be that fragile, can it?

Yes I am, a delicate flower!

Well though. . .since you bring it up. . .what is the "herd" doing and what is "BA" doing that's different then? (honest question. . .not rhetorical this time)

I'm surprised that you even need to ask that. I took an oil position, you know that. Also, I'm not in precious metal, even though gold is having a record rally at this point. Think about it. The "herd" is currently on a full-on charge with precious metal, and I didn't get involved.

It is NOT the asset class we choose that decides whether we are "centrists" or "radicals", group-thinkers or independent. Rather, it is how we choose to use these asset classes that reveals our true nature.

Also, please remember that I have no problems going with the herd either. Like I said, I'll go wherever I think I can find an opportunity to make money.

[disneysteve]

The "herd" is currently on a full-on charge with precious metal, and I didn't get involved.

This is a very important point and totally illustrative of the herd behavior. Most people buy last year's news. In other words, they buy what has been on a great run up until now. The problem, of course, is that usually results in them buying an asset, whether it be a stock, oil, gold, real estate or frozen orange juice futures, that has already had its run and has peaked or nearly so. They are attracted by past performance rather than future prospects.

I spent time and money buying bank stocks early this year at a time when the sector was crashing and burning. Guess what. I made money doing so? The herd was charging in the opposite direction, getting as far away from banks as possible.

Who was it that said, "The time to make money in the market is when there is blood in the streets."

As BA has pointed out, that applies equally well to all asset classes, not just stocks. If you, Scanner, choose to avoid stocks, that's fine. You probably use a similar mindset when investing in other assets because I certainly don't think you have a herd mentality either.

[EEinNJ]

This is a very important point and totally illustrative of the herd behavior. Most people buy last year's news. In other words, they buy what has been on a great run up until now. The problem, of course, is that usually results in them buying an asset, whether it be a stock, oil, gold, real estate or frozen orange juice futures, that has already had its run and has peaked or nearly so. They are attracted by past performance rather than future prospects.

I spent time and money buying bank stocks early this year at a time when the sector was crashing and burning. Guess what. I made money doing so? The herd was charging in the opposite direction, getting as far away from banks as possible.

Who was it that said, "The time to make money in the market is when there is blood in the streets."

As BA has pointed out, that applies equally well to all asset classes, not just stocks. If you, Scanner, choose to avoid stocks, that's fine. You probably use a similar mindset when investing in other assets because I certainly don't think you have a herd mentality either.

Generally attributed to Buffett. Also, be greedy when others are fearful, and fearful when others are greedy.

I heard recently that growth in the S&P 500 is mostly from a few stocks that have done very well. That tells me that to do better than mediocre you have to be a real good stock picker. That's something the individual investors doesn't have a chance at, when even the pro's aren't consistently successful.

[disneysteve]

I heard recently that growth in the S&P 500 is mostly from a few stocks that have done very well. That tells me that to do better than mediocre you have to be a real good stock picker.

Not at all. As I pointed out above, my S&P 500 index fund is up 19% YTD. I don't consider that mediocre. I didn't pick stocks. I just picked a very low cost index fund. Anybody can do that.

[EEinNJ]

The factoid I mentioned was referring to long term performance. 19% YTD is great, if you were lucky enough to buy in the beginning of the year. If you bought this time a year ago, you might be "Even Steven" (sorry ) after holding on for dear life. Don't get me wrong, I've been in an allocation of index funds for 15 years, but the S&P 500 has been one of the dogs. If I'd put that money in XOM or JNJ, the only individual stocks I have held long term (and in the S&P 500) I'd have much better results.

[disneysteve]

The factoid I mentioned was referring to long term performance. 19% YTD is great, if you were lucky enough to buy in the beginning of the year. If you bought this time a year ago, you might be "Even Steven" (sorry ) after holding on for dear life. Don't get me wrong, I've been in an allocation of index funds for 15 years, but the S&P 500 has been one of the dogs. If I'd put that money in XOM or JNJ, the only individual stocks I have held long term (and in the S&P 500) I'd have much better results.

That's true. That's why we all preach diversification. An S&P 500 fund is not a bad core holding but it shouldn't be your whole portfolio. You should also have small company stocks, international stocks, real estate, maybe commodities and precious metals, bonds, etc. My S&P fund has been flat over the past 10 years but I have other holdings that have done just fine with average annual returns of 9-10% over the past 10 years.